We hear all the time that if you have credit scores in the 700’s, then you have excellent credit.  This is not always the case if you are looking for the absolute best interest rate for a mortgage loan.  You see, given the recent changes in the lending environment, the credit score has become more important than ever.

I’m going to lay out some very specific examples that show why a 700 credit score versus higher credit scores, means all the difference in mortgage interest rates.  You will also notice the thousands of dollars in savings, over the life of the mortgage loan, that is saved with a lower mortgage rate.

Now, let’s imagine for a moment that interest rates are determined by credit scores solely and not the other factors that usually go into determining your mortgage interest rate.  I say this, because mortgage interest rates can be a complicated beast.  I sometimes wish a customer could call me with the question, “What are your interest rates?” and I could give him/her a quick and simple answer.  Unfortunately, that question is not as easily answered as one would think.  Why?  Mortgage interest rates are determined by the following:

• Credit score.
• Loan amount.
• Property value.
• Type of property.
• Transaction type (cash out refinance, purchase)

…and these are not all of them.

Ok, let’s get back to the topic at hand…how important are credit scores?

First, remember that in the mortgage world, we go off the middle of the three credit scores.  So, if you happen to only know one of your credit scores, make sure you know all three credit scores from the three major credit bureaus.  Experian, TransUnion, and Equifax.

Everyone should check their own credit report for errors.  Especially, if you plan on applying for a loan in the near future.

Now, check out these 3 specific examples and notice the difference in interest paid, compared to the credit score.

 Example 1

Your middle credit score is 700.  The property you are buying is $250,000.  You are putting 5% down, so your loan amount is $237,500.  The interest for your 30 year fixed mortgage is 5.0%.  The mortgage payment (not including the property taxes, homeowners insurance, and PMI) is $1274.95.  The total amount of interest you pay just for the first 5 years is $57,090.31

Example 2

Your middle credit score is 720.  The property you are buying is $250,000.  You are putting 5% down, so your loan amount is $237,500.  The interest for your 30 year fixed mortgage is 4.75%.  The mortgage payment (not including the property taxes, homeowners insurance, and PMI) is $1238.91.  The total amount of interest you pay just for the first 5 years is $54,143.08

Example 3

Your middle credit score is 740.  The property you are buying is $250,000.  You are putting 5% down, so your loan amount is $237,500.  The interest for your 30 year fixed mortgage is 5.0%.  The mortgage payment (not including the property taxes, homeowners insurance, and PMI) is $1221.08.  The total amount of interest you pay just for the first 5 years is $52,672.05

The amount of interest you save in the first 5 years of your mortgage is $4418.26.  Want to know the savings over the life of the mortgage?

It will be in the next post.

Moral of the story:  Check your credit scores before applying for a mortgage, any loan for that matter, because it will save you thousands!

The down payment seems to be one of the most important factors in buying a home.  As it should be, because the more money you put down, the lower your total monthly mortgage payment will be.

A down payment should be determined by the following questions:

1.  How much can you afford?

Your down payment should NOT consist of all the money you have in your savings account.  Why?  Well, let’s say the water heater happens to break down in the first year of buying the home.  That kind of break down can cost thousands of dollars!  It’s something most people would never expect, but it’s possible.

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You see, most people buy an existing home (especially a first time home buyer) and existing homes do have wear and tear just like anything else.  Eventually, something will break or tear, leading to a repair.  Sometimes it may only cost $10, but other times it may cost $5000.  So, keep a little money in that savings account in case of an emergency.  You will thank me later!

2.  Is the monthly payment or the down payment more important to me?

It’s quite simple, the more of a down payment you have, the less your overall monthly payment will be.  The less of a down payment you have, the more your overall monthly payment will be.

Example in real numbers:

The purchase price is $200,000 and you decide that a down payment of 20% is something you can afford.  The principal and interest payment (not including the taxes and insurance) on a 30 year mortgage at 5.0% would be $858.91.  Now, assuming the same scenario, but the down payment is only 10%, the payment would be $966.28.  The difference in a monthly payment is $107.37.  Over 1 year that’s $1288.44.  Over 5 years that’s $6442.20!

The important part to keep in mind about that example is that the difference in monthly payments just saved you $6442.20 over the next 5 years, because the down payment is only 10%.  Now, the difference in down payment money is $10,000.  So, if you are looking to save the most money out of your pocket, then put a less of a down payment down.  As long as the monthly payment is affordable, you will always keep more money will less of a down payment.

3.  What is the minimum down payment lenders allow?

Right now, in today’s lending environment, there are only 2 ways to obtain a mortgage with absolutely no money down.

1. VA Mortgage Loan – You can be eligable for this type of mortgage if you or your spouse is active in the military or is a veteran of the military.
2. Rural Housing Loan – You can be eligible for this type of mortgage if the home you are looking to buy is in a rural housing area.  The area is determined by the USDA.

…if you have more questions about the details of those two no down payment mortgage loans, please don’t hesitate to contact me. 

If you don’t qualify for a no down payment mortgage loan, then the next lowest down payment mortgage is a FHA mortgage loan.  FHA only requires a minimum of 3.5% for a down payment.  Yes, only 3.5% is required for a down payment with this mortgage program.  It has become the most popular program lately, because of it’s low down payment, favorable interest rates, and you can still qualify will less than perfect credit.

These are the types of questions you should know the answers to before looking to buy a new home.  The more knowledge you have, the more comfortable you will be in making an offer on a home.

If you are a first time home buyer, you should read Top 5 Mortgage Questions Answered For First Time Home Buyers.

Don’t forget to read up on closing cost credits.

Currently, 70% of all credit reports contain errors due to poor credit management.

Get Your 3 Credit Scores Online Free!

Whether you are just starting to first build your credit history or starting over fresh, there are real simple steps you can follow that can easily increase your credit scores.  These are the steps everyone should follow, since this is how everyone’s credit scores are calculated.

Step 1 – Payment History (makes up 35% of your credit score)

Open an account where the payment history reports to all three major credit bureaus.  The three major credit bureaus are TransUnion, Experian, and Equifax.  This factor makes up the largest part of your credit score.  If you credit is so bad that you feel no credit card company will approve a card for you, then I highly recommend starting with a prepaid credit card.  Everyone is approved and the account history reports to all three major bureaus like any other major credit card account would.

Step 2 – Amounts Owed (makes up 30% of your credit score)

The total balances of all credit line accounts should not exceed 30% of your total credit available for all accounts.  These pertain to revolving lines of credit.  So, your mortgage, auto loan, etc. does not count as a revolving line of credit.  Here is an example to simply understand what this means:

Example:
If you had 3 credit cards, all with a $1000 credit limit for each, your total credit limit would be $3000.  If each of these credit cards had a balance of $500, then your total balance would be $1500.  So, your total balance ($1500) over your total credit limit ($3000), would be 50%.

Step 3 – Length of Credit History (makes up 15% of your credit score)

If you are just opening your first credit account, it only takes about 6 months for the major bureaus to credit your scores in a positive way.  You want to make 12 months of payments as a goal for a good length in credit history.  The longer your history, the more it will help to increase your credit score.

Step 4 – New Credit Accounts (makes up 10% of your credit score)

When you apply for multiple credit accounts in a short period of time, your credit score will be affected.  It’s not a dramatic affect on your credit score, but it definitely can lower your score.  You are viewed as a risk, because applying for too many accounts in a short period of time looks like a desperate move to access money.  I recommend no more than 3 inquiries when comparing companies.

Step 5 - Types of Credit Used (makes up 10% of your credit score)

There are a variety of credit accounts, like mortgages, credit cards, auto, etc.  When you have established a payment history in multiple accounts it helps show you can handle different types of accounts.  This will help to increase your credit scores as well.

This should help you to understand how your credit score is affected.  Once you see your first positive increase in your credit score, then you will realize this can be done! 

Now, if you are someone that doesn’t want to take the time to do this yourself, that’s ok.  There are credit repair companies that do a very good job in helping you repair your credit scores.  In my years in working with credit, I would recommend the following:

1.  Lexington Law – Credit Report Repair

2.  Veracity Credit Repair

I encourage you to leave a comment or question that you may have about credit scores.

It was late December 2008/early January 2009 when the media first announced the talk of the government trying to drop mortgage interest rates as low as 4.5%. 

We are now in early March and no one seems to be able to find the 4.5% 30 year fixed rate….unless you want to pay points or thousands of dollars in closing costs.

Why haven’t we seen the 4.5% rate yet?  Well, without trying to confuse anyone, I’m going to explain in lehman’s terms the best way I can…

The FED announced that they would become active in buying mortgage backed securities, because they know these securities (a.k.a. mortgage bonds) have a direct effect on the mortgage rates.  Without getting into to much detail, mortgage bonds are bought and sold by investors just like stocks in the stock market.  When the price of mortgage bond start to increase, investors start to rally and buy, buy, buy before the price is to high to resell for a profit.  The same goes when the price of mortgage bonds start to drop and investors sell, sell, sell.

Well, think about this, when the government steps up and starts to purchase these bonds (and we are talking billions of dollars a day sometimes), investors see the price of mortgage bond start to rise, so this would case them to buy, buy, buy.  When the mortgage bonds prices rally in price, this causes mortgage rates to drop.

This happened the week following Thanksgiving in 2008, where, in one day, mortgage rate were about a whole point better than the day before.  In the mortgage world here, that’s a huge difference in just one day!

Unfortunately, there are two negative things that have happened, since the FED started to purchase mortgage back securities and major drop in mortgage rates:

1.  2008 was a sad year, because many lenders either went out of business or laid off a lot of their employees just to stay in business.  So, coming off a year where things were really slow, an overnight flood of mortgage refinance applications caused lenders to become overworked and understaffed.  You would think the lenders would do what any business would do when you get to busy and hire more employees.  Well, additional help was hired, but not much, because most lenders think that this sudden rush of business will only be temporary.

So, how do these lenders react to the sudden influx of business?  They increases mortgage rates to control the amount of volume they can handle.  As turnaround times and processes came back down to normal, they would adjust their rates back to where they should be.  I know, call it unfair or call it what you think, but we are all at the mercy of these lenders.  If the mortgage rates should be lower, they should give them to the consumer!

2.  The rise in Treasury yields  are poised to see their worse month since March of 2004.  (source: bloomberg.com)  This has caused an increase in mortgage rates as well.  This seems to be offsetting the moves the FED is taking to lower the mortgage rates.

People are starting to either get worried or give up on waiting for this magical 4.5% mortgage rate.  Some of my own customers have locked in their rates over the last few days and I don’t blame them.  If you are happy with the current market rate and it helps reduce your mortgage payment, lock it.  Don’t let greed blind you, because any mortgage rate below 6% is still considered historically low for mortgage rates.